Thursday, February 19, 2015

Eurozone - Bluff or u-turn?

The next act of the Greek crisis has all the elements for a new blockbuster: conciliation, refusal, only the happy end is still far from certain.
What a day. Yesterday, events in the Eurozone unfolded at a breakneck pace. First, the Greek government submitted an official request to extend its bailout by six months. More than an hour later, the German government reacted with a strict refusal.
Are the Germans a party pooper? This was the first reaction to the series of events. Now that Greece finally came across and let go earlier positions regarding the bailout, what made the Germans refuse it? To understand the German refusal, one has to apply lots of semantic skills and European institutional memory. In the official Greek letter, Finance Minister Varoufakis asked for an extension of the “Master Financial Assistance Facility Agreement” (MAFA). This is only one part of the bailout programme, the laying out of the financing scheme. The so-called Memorandum of Understanding (MoU) which includes all reforms and policy requirements was not mentioned at all by Varoufakis. While some claim that accepting the MFAFA automatically includes the MoU, there is a legal escape clause stating that the MoU should be applied unless otherwise specified. In the eyes of the German government, not mentioning the MoU is another Greek provocation. Moreover, the Greek government’s letter has little concrete commitments, except for the promise to only implement fiscally-neutral new policy measures. For the rest, the letter suggests that the role of the Troika should be redefined as well as further financial agreements. As such, the letter can be interpreted as the request for a bridging facility with the only goal of renegotiating the bailout programme but little concrete commitments. In the eyes of the German government, the Greek letter could just be a Trojan horse, bringing more cumbersome discussions and fights to the Eurozone.
The current dispute is only at first glance a semantic dispute. In fact, the Greek government’s letter invited the view that it is only a smart attempt to extend the loan while escaping full conditionality, trying to keep Greece and Greek banks afloat with ECB support. The positive interpretation of the Greek letter is that it is the first substantial concession of the Greek government and that a real compromise is within reach.
When Eurozone finance ministers meet today for a special meeting in Brussels, the Eurozone will get its next face-off. A face-off with an open end: either the Greek government will go all the way and convince its Eurozone partners, particularly the ones where national parliaments would have to agree to an extension of the loan, that its commitment is credible, or the German government was right and yesterday’s letter was only a bluff. In the latter case, any happy end would be deferred to a distant future.